Why intercompany transactions

Diversification Back to Top Strategic Planning. Free Analysis. Regional Websites. Intercompany Transactions Definition: An intercompany transaction is one between a parent company and its subsidiaries or other related entities.

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Pr Firm Our Awards. Maybe you have a central order fulfillment operation that sources products from multiple related entities based on availability, or product characteristics. Perhaps you also have a central organization that provides administrative services for all other related entities and then charges them for such services.

Ideally, the accounting across all business operations should be performed by and captured in a single system. Even if a single accounting system is used to process individual transactions, period end reporting for intercompany transactions presents additional issues. The effect of intercompany transactions needs to be eliminated from consolidated Income Statement and Balance Sheet reporting.

This implies that the accounting system can separately identify and aggregate all intercompany transactions. If and how an accounting system captures intercompany transactions will have a significant impact on the ease and accuracy with which consolidated reporting is performed.

Classification of Intercompany transactions Intercompany sales can be divided into three main categories: Downstream transaction : This is a transaction from the origin to the subsidiary.

Upstream transaction: This is a performance from subsidiary to parent. Lateral transaction: This is a transaction between two subsidiaries of the same company. Inventory sales in downstream transactions from parent to subsidiary are accounted for as internal transfers between departments of a single entity: In consolidated income statements, exclude intercompany revenue and cost of sales arising from the transaction. Inventory sales in upstream steps from subsidiary to parent : In consolidated income statements, discharge intercompany income and cost of sales resulting from the transaction.

In the consolidated balance sheet, release intercompany obligatory and receivable. Profits and losses are excluded against noncontrolling and controlling share proportionally. Downstream intercompany loan, the profit charged is recognised as an expense by a borrower: In consolidated earnings statements, interest income approved by the parent and expense classified by the subsidiary is eliminated.

A variety of third - party reconciliation tools on the market have this functionality. Some are capable of managing high volumes and are used in the retail industry. Others are scaled down to provide the same type of service for small companies with fewer transactions. Providers of these tools include BlackLine, Oracle, and Trintech. Intercompany accounting faces additional challenges as it deals with money that flows across multiple legal entities of a company, often globally.

A Deloitte poll of more than 3, accounting and finance professionals suggests that disparate software systems in the different legal entities pose the biggest problem Growth through acquisition is a key strategy at TrueBlue, an on-demand staffing and professional recruitment company based in Tacoma, Wash.

The flow of data from each system into the core ERP has yet to be verified and validated to ensure accuracy in reporting. Add manual processes to the mix, and the struggle can be magnified without solid communications in place. To avoid problems, communication in any form—email, teleconferences, meetings, and phone calls—is key, she said. During the week that TrueBlue goes through the monthly close, finance staff at corporate headquarters assembles for a minute daily standup to discuss issues and a daily teleconference with their colleagues in Chicago, who manage part of the business.

Cooperation of accounting, tax, and treasury can also make it easier to tackle the challenges, especially when the legal entities involved in intercompany accounting follow a framework of standardized global policies that governs critical areas across the business.

A minority of the participants in the Deloitte survey said their company follows such a holistic approach. More than two-thirds of respondents said an intercompany accounting framework was a goal they were working toward, but only 9. Accounting, tax, and treasury had combined efforts to manage intercompany accounting at the businesses of about one-quarter of respondents. The majority of respondents Sabine Vollmer is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact her at svollmer aicpa.

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